Russian-backed rebels advanced to encircle a Ukrainian army garrison town on Monday in a new offensive that has again unleashed all-out war after a five-month ceasefire and brought threats of new Western sanctions against Moscow.

The United States and the European Union are considering new measures after accusing Russia of openly supporting the latest rebel advance with money, arms and troops on the ground.

Ambassadors of NATO countries and Ukraine met in Brussels on Monday to discuss a response to the fighting, their first such emergency meeting since August.

Moscow denies playing a military role. Russian President Vladimir Putin accused Kiev of prolonging the conflict by refusing to talk to the rebels.

In a provocative new charge, Putin also said a "foreign NATO legion" was fighting alongside Ukrainian forces. NATO called the accusation "nonsense" and said the only foreign troops in Ukraine were Russians.

The government in Kiev ordered a state of emergency across the two rebel-dominated provinces and placed all Ukrainian territory on high alert.

Its military said seven Ukrainian soldiers had been killed and 24 wounded in intensified clashes in the past 24 hours, with heavy fighting at Debaltseve, a small town the rebels have vowed to encircle to safeguard their main strongholds.

Violence in eastern Ukraine is at by far its worst since a ceasefire was agreed last September. Casualties have mounted, including in the big government-held port of Mariupol where Kiev says 30 civilians were killed in rebel shelling on Saturday.

After months during which the truce was punctured by small-scale skirmishes on the front line, rebels fighting for territory the Kremlin calls "New Russia" said last week they were left with no choice but to launch an advance. Their main aim, they say, is to push back government forces that had been shelling rebel-held cities.

The Kiev government sees the rebel advance as a repudiation of the ceasefire, restarting a war in which 5,000 people have been killed. Kiev and NATO believe thousands of Russian troops are in eastern Ukraine fighting on the rebels' behalf with advanced weapons, despite Moscow's denials.

"Rebels are constantly attacking Ukrainian government positions across the conflict zone with artillery, mortars, grenade launchers, tanks," Kiev military spokesman Volodymyr Polyovy said at a televised briefing.

The rebels are targeting Debaltseve, a town with a population of around 26,000 that straddles the main road and train line between the two principal rebel strongholds, Donetsk and Luhansk. They say the government garrison there allows Kiev's guns to menace civilian areas.

"Look on the map. There is a so-called 'Debaltseve tongue'," separatist deputy commander Eduard Basurin told Reuters by telephone, referring to a kink in the frontline where the government holds the town. The rebel goal was "to push (government forces) further back from us, from settlements, and straighten the (front) line," he said.

He denied that the rebels had launched any assault on Mariupol, the port of 500,000 people which is by far the biggest government-held city in the two rebel dominated provinces. "We have no offensive there. On the city itself – absolutely none."

Smashed up

Ivan, a 35-year-old who fled Debaltseve months ago but spoke earlier on Monday to relatives inside the town, said it was almost entirely surrounded by the rebel advance.

"It's been almost impossible to get through for the past 48 hours. The road is being shot up by separatists. There is no electricity, no water. The hospital is all smashed up and the shops aren't working," said Ivan, who declined to use his surname for security reasons.

"Ukrainian troops are still holding on in the town, but the question is how long they can hold on without more support."

The military has reported civilian casualties at Debaltseve without giving any figures.

After months during which European politicians discussed whether to start easing sanctions on Russia, the return of fighting has suddenly shifted the debate to how to tighten them. Sanctions and the falling oil price have caused serious economic damage to Russia, with the rouble currency tumbling over the course of the past two months.

The European Union has summoned foreign ministers of its 28 member states to an emergency meeting on Thursday.

U.S. President Barack Obama said on Sunday Washington was considering all options short of military action to respond to "the aggression that these separatists - with Russian backing, Russian equipment, Russian financing, Russian training and Russian troops - are conducting."

Treasury Secretary Jack Lew said Washington has "more tools" to put pressure on Moscow. Germany's Foreign Minister Frank-Walter Steinmeier hinted at further sanctions, saying an assault on government-held Mariupol would demand a European response.

Moscow maintains Kiev is to blame for the latest fighting for refusing to pull its heavy weapons from the front and negotiate directly with the rebels.

"Unfortunately, Ukrainian authorities are refusing a peaceful solution. They don't want political efforts," Putin told a group of students on Monday in St Petersburg. In a new charge, he spoke of a "NATO foreign legion" fighting alongside government troops.

"There are official divisions of the armed forces but to a great extent there are so-called voluntary nationalist battalions. This is not even an army, it's a foreign legion. In this case it's a foreign NATO legion," Putin said.

NATO Secretary-General Jens Stoltenberg dismissed the accusation as "nonsense". "There is no NATO legion," he told reporters. "The foreign forces in Ukraine are Russian."

It remains to be seen how far the rebels intend to push their advance. Western governments that suspect the Kremlin's hand is behind the rebels have long said they believe Putin's goal is a stable "frozen conflict" on Ukrainian territory.

If so, the present advance may be intended mainly to push government troops further from Donetsk and Luhansk, to make those two strongholds more secure.

Mariupol could also be a tempting prize: capturing it would link rebel-held Donetsk with the sea and Crimea, a peninsula annexed by Russia last year. But any battle for the large port would involve urban warfare on a scale unprecedented so far in the conflict. Rebels halted at Mariupol's gates during their last big offensive, before the ceasefire in September.